Market corrections can be great opportunities for savvy investors. While the rest of the investing world is worried about their losses, people with a long-term approach have a chance to buy high-quality stocks at a discounted price. These three stocks have strong long-term growth catalysts that would be even more attractive if valuations pull back a bit.
1. Microsoft
Microsoft (MSFT 1.82%) has been a bright spot on the stock market throughout 2023 with a total return of over 40% year to date. Investors pulled out of the market last year due to rising interest rates and macroeconomic uncertainty around the globe. Those bearish sentiments have relaxed a bit this year, prompting investors to flock back to stocks in anticipation of a potential market recovery.
The hype around artificial intelligence (AI) has also helped send shares of Microsoft higher this year, and it remains an attractive stock to buy during a pullback.
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Microsoft is a diversified operation with several key business that either produce reliable cash flow or have long-term growth potential. The company holds enormous market share in computer operating systems and productivity technology with Windows, Teams, and its Office suite. Its Azure segment is among the leaders in data and cloud computing. It's also a major player in gaming and artificial intelligence, which are likely to be high-growth categories for years to come. Microsoft faces stiff competition from formidable rivals in each of those segments, but it's created an empire that's highly likely to yield cash-flow and earnings growth for the foreseeable future. That might be the most attractive characteristic a stock can have.
Those qualities aren't lost on investors, and Microsoft stock's strong year has pushed its forward price-to-earnings (P/E) ratio above 30. You could justify that valuation by focusing on the 15% annual earnings growth analysts expect the company to generate over the next five years, but it's still no value stock.
If there's a market correction that causes Microsoft to tumble 10% or more (like it did last year), investors should be ready to pounce on the opportunity. This is an industry-leading company with serious staying power.
2. CrowdStrike
CrowdStrike (CRWD 2.03%) is an alternative for investors seeking a higher-risk, higher-reward opportunity. The cybersecurity stock has established itself as a leader in cloud-based endpoint security, which is extremely relevant for just about every business, government, and organization that operates today. Demand for these services is likely to keep rising over time, and CrowdStrike is leaning into AI solutions to maintain its leadership throughout an ever-changing environment.
Its product suite gets exceptional reviews from third-party ratings organizations, and its customer data backs that up. The company boasts an exceptional net dollar retention rate above 125%, indicating that customers are pleased with its quality and value proposition. It's also clear evidence the company is able to upsell its existing customer base as it rolls out new services.
CrowdStrike has operated around breakeven during the last few quarters on a GAAP basis, but much of that is due to noncash expenses, such as amortization and stock-based compensation. CrowdStrike produced nearly $190 million in free cash flow during its fiscal 2024 second quarter.
That cash generation is impressive when considered alongside its growth. CrowdStrike reported 37% revenue growth in the same period. Its annual recurring revenue (ARR), which measures the annual value of current subscription contracts, grew at a similar pace to reach $2.9 billion. The company expects its addressable market to double over the next three years, so there's a clear path to extend its momentum going forward.
That strong growth profile has pushed the stock's forward P/E ratio to 62. Volatility is inherent to growth stock investing, and CrowdStrike is no exception. There's a case to be made at the current valuation, but a pullback would skew the risk-reward balance in favor of the buyer.
3. Veeva Systems
Veeva Systems (VEEV 0.91%) provides a suite of cloud-based tools to the life sciences industry. Its software is used in a variety of mission-critical functions, including research and development, regulatory compliance, clinical trials, data management, and sales and marketing for the pharmaceutical, biotech, diagnostics, and related industries.
Founded by former employees of Salesforce, it has a similar value proposition for a highly specialized and regulated niche market, which it dominates. That creates a formidable economic moat for Veeva, and it helps that life science industry growth is expected to outpace the global economy for the next decade.
Veeva reported 10% revenue growth and 22% earnings growth in its fiscal 2024 second quarter. With an adjusted operating margin of 35% and $265 million in free cash flow last quarter, the company is pushing forward despite global macroeconomic issues.
The stock trades at a forward P/E ratio of 41. That's reasonable, given its growth profile, but far from cheap. If a market correction takes the share price down a few notches, investors should consider picking Veeva up on the dip. Its market leadership, competitive advantage, and growth catalysts make for a strong bull case.
